Discount as an additional consideration!

Introduction

 

The concept of discounts has always been associated with sales. The same has been used by businesses, both large and small to increase the revenue. Such discounts on most occasions are given directly and at the behest of the manufacturers. In supply structures involving a manufacturer, a distributor and a dealer/customer, discounts are generally routed through the distributor and can partake two forms i.e., pre-supply and post supply discounts.

 

Pre-supply Discounts	Discounts which are given prior to the supply of goods and generally mentioned in the invoice.
Post-supply Discounts	Discounts which are known at the time of supply but may not be quantified (or) discounts not known at the time of supply and are issued/given subsequently.

The position on taxability of pre-supply discounts is largely clear. Such discounts are explicitly mentioned in the invoice and are excludable from the value of supply in accordance with Section 15(3) of the Central Goods and Services Tax Act, 2017 ("CGST Act"). However, disputes continue to exist on the treatment of post-supply discounts, which have been a bone of contention in the erstwhile regime as well.

The current article proposes to examine an interesting proposition which has arising out of the decision of the Kerala Appellate Authority of Advance Ruling ("AAAR") in Santhosh Distributors1 This case examined the GST implications of post supply discounts routed through a supply chain involving a manufacturer, a distributor, and a dealer.

Facts of the case

 

The Assessee was an authorised distributor of the Manufacturer who supplied goods to its Dealers. As per the contract entered between the Assessee and the Manufacturer, the Assessee had to purchase lubricants from the Manufacturer and sell them to the Dealers based on the rates pre-fixed by the Manufacturer for which the Assessee was entitled to a distributor's rebate.

In addition to the above, the Manufacturer offered post supply discounts to be passed to the Dealers through the Assessee. Subsequently, such post supply discounts offered were reimbursed by the Manufacturer to the Assessee via commercial credit notes.

In the background of these facts, the Assessee approached the Authority for Advance Rulings ("AAR") to determine whether the post supply discounts provided by the Manufacturer to the Dealers through the Assessee would attract any tax under GST along with other issues.

The AAR held that such discounts passed on by manufacturer to the distributor (assessee) will constitute an additional consideration for the sale of goods by the distributor to the dealer. Aggrieved by the said ruling, the Assessee sought an appeal to the AAAR.

AAAR's Ruling

 

The Assessee vehemently contended that since the post-supply discounts were routed through the supply chain, they formed an intrinsic part of the transaction value of Castrol for which GST was discharged. Furthermore, GST is levied on the actual consideration i.e. price actually paid or payable qua the supply and does not extend to any notional consideration. Thus, the Assessee prayed to set aside the ruling.

The AAAR rejected the contentions of the Assessee. It was held that post supply discounts provided by the Manufacturer to the Assessee were to augment sales and thus, the post supply discounts would represent consideration flowing from the Manufacturer to the Assessee for supply of goods made to the dealers. Hence, this amount would squarely fall under the definition of the term "consideration" as specified under section 2(31) of the CGST Act.

Our Analysis:

 

In our humble opinion, we feel that the AAAR may not have laid out the proper interpretation of what constitutes a consideration. Though a specific reference was not placed, the AAAR conveniently applied the logic flowing from Circular No. 105/24/2019- GST dated 28-6-2019,2 which was withdrawn in light of various representations submitted by members of the trade and industry. The said Circular verbatim stated that additional discount given by a supplier of goods to dealer to offer a special reduced price to customer to augment the sale volume would represent consideration flowing from supplier of goods to dealer.

In our view, GST is a contract-based levy and only such amount which is agreed as the price agreed between the two parties i.e. supplier and recipient, will constitute consideration for such supply. Consideration is a matter of inducement of something promised and requires a direct link or nexus with the supply and in the present case, the Dealers are not privy to the contract entered between the Assessee and the Manufacturer.

Thus, it follows that, the price at which goods are sold to the Dealers should have no role to play with respect to increase in price of goods agreed between the Assessee and the Dealer. Such reasoning is based on a Division Bench decision of the Madhya Pradesh High Court in Rita Sales Corporation.3

In Rita Sales Corporation, the manufacturer had introduced a gift scheme, according to which the distributor, had to purchase the timepieces at their cost price and in turn sell the machines at 50% of cost price to the retailers. The balance 50% was agreed to be paid by the manufacturer. The question before the High Court was whether such amount received from the manufacturer would form part of sale price paid by retailer to distributor and hence, liable to be included in turnover for purpose of taxation.

The High Court answered the aforesaid issue in favour of the Assessee. It was held that vis-à-vis the distributor and retailer, the sale was complete at the price to which they had agreed i.e. 50% of actual cost price. Even though the manufacturer had promised to pay the balance 50 per cent price to the distributor, it would not mean that the distributor has sold the timepieces to the retailer at this full price. Thus, the Court rejected the argument that the dealer was liable for payment of sales tax on the full amount of timepieces sold by him, even though he sold the same at 50 per cent of its cost price.

Applying the ratio enunciated in the aforesaid Court ruling, it can be said that post supply discount offered by the Manufacturer in the case of Santhosh Distributors (supra) will not partake the character of consideration flowing from dealers to distributors.

Going forward, considering the fact this issue will be contested in various forums, it will helpful if the Board issues a Circular clarifying this issue pertaining to discount.

1. Santosh Distributors, In re [Order No. AAR/10/2021, dated 1-3-2021]. 2. Circular No. 112, dated 3rd October, 2019.

3. CST v. Rita Sales Corpn. [1986] 61 STC 240 (MP)